Red, White, and Scammed

More by
Earl

Diann Traina is one of many service members who’ve learned to be smarter consumers.

The used BMW was pretty, its silver paint gleaming, and the $17,000 price was reasonable. So, in March 2007, U.S. Army Spc. Diann Traina signed a contract, took out a loan, and traded in her pickup to buy the sedan at a dealership in Fayetteville, N.C., right outside the gates of Fort Bragg.

What she didn’t know was that the dealer had taken out a loan against his inventory and didn’t actually own the vehicle he sold her. Spc. Traina was never able to get the title to the BMW, so when the dealership shut down soon afterward, she was stuck—without a car and with an $11,000 debt. In the meantime, she had been deployed to Iraq, leaving her helpless to do much about it.

Like thousands of service members engaged in fighting America’s battles overseas, Spc. Traina had encountered a foe here at home. Young, inexperienced, and often drawing their first paychecks, enlisted men and women are easy marks for sleazy car dealers, insurance scammers, predatory lenders, and identity thieves. So pervasive are the rip-offs—and so troubling the debt incurred by military personnel as a result—that U.S. Department of Defense officials recently labeled the situation a threat to national security. “You don’t want them distracted while they’re out on the front lines,” says Clifford L. Stanley, undersecretary of defense for personnel and readiness. “But they will be if they’re worrying about what’s going on at home.”

Dwain Alexander II, a civilian lawyer for the Navy in Norfolk, Va., seconds the opinion. “If you’re sitting at the helm of a multibillion-dollar vessel and you’re worried about whether your wife can stay in the place you’re renting, you’re not fully focused on what you’re doing. Incremental mistakes can lead to catastrophic endings.”

America’s soldiers, sailors, airmen, and marines have guaranteed paychecks and won’t ever get laid off. These factors make them good credit risks. It also makes them targets. “There are a lot of people who see service members as cash cows,” says Holly Petraeus, director of the military program of the Better Business Bureau (BBB) and wife of Army Gen. David Petraeus, whom President Obama recently named to serve as commander of U.S. and NATO forces in Afghanistan. “Go to any city with a big military installation, and there’s a cluster outside the gates—Fast Freddy’s auto loans, pawn shops, check cashers.” The daughter of a four-star general, Petraeus advocates for service members and their families and works with BBB affiliates to provide troops with financial education.

A recruit typically earns less than $1800 a month, and too often these modest paychecks are carved to bits by bad deals. According to Navy lawyers, a computer store outside the Great Lakes Naval Training Center in Illinois employed attractive women to troll for new sailors. Once inside, the recruits were pressured into buying bare-bones laptop computers—for more than $4000. (The store has since closed.)

Life-insurance scams are another scourge. When John Oxendine, Georgia’s insurance commissioner, learned that soldiers at Fort Benning had been sold “extremely overpriced” or misrepresented policies before shipping off to the Middle East, he helped launch a multistate investigation. The probe has spurred companies to offer $70 million in refunds to thousands of service members. “What you’re basically seeing is war profiteering,” Oxendine says. “These are people who are putting their lives on the line for us. We owe them.”

Washington has waged war against the scammers with limited success. When a 2006 Defense Department report cited payday lenders as a threat—rates for short-term loans had soared as high as 780%—Congress passed an amendment to the Defense Authorization Act of 2007 that capped rates on such loans to military personnel at 36%. “Many payday-loan businesses stopped lending to service members,” Petraeus says, “because they said they couldn’t make a profit.”

The less principled, however, simply altered their tactics. Some lenders abide by the cap but drown their products in fees—in one reported case, $452 of charges were piled on a $1000 loan. Others base their businesses offshore and call their offerings “revolving lines of credit”—both so they can skirt U.S. laws and charge 500% interest. In her Arlington, Va., office, Petraeus typed “ military loans” into Google. “I got about 2.5 million results from that,” she says. “A lot of them are predatory or just outright scams.”

Those in uniform have more than money to lose if they’re taken for a ride. Financial trouble is a major reason that service members are stripped of security clearance. “When officials do an investigation for security clearance,” Petraeus explains, “they look for vulnerabilities that would make you prone to offers.”

Unscrupulous auto dealerships are a huge source of complaints, defense officials say. In exchange for “easy credit,” buyers may pay jacked-up prices, hidden fees, and interest rates of 15% to 20%. Military financial counselors have files full of horror stories. Bad dealers have taken buyers’ cars in trade, promising to pay them off, and then gone out of business without doing so, leaving service members with two car payments. There are also “yo-yo” deals, in which a service member is sold a car but told a few days later that financing fell through and that keeping the vehicle will cost thousands of dollars more. Some dealers pounce on troops as they arrive home from deployment. “They pick up these guys as they walk off the ship,” Alexander says. Marines at North Carolina’s Camp Lejeune were offered rides to a dealership that turned out to be more than three hours away—and then were left stranded and in danger of going AWOL if they didn’t buy.

Perhaps the most obnoxious offenders are those who pose as all-American boosters. “They put up big flags and say, ‘Welcome, sailors; welcome, soldiers,’” says Rosemary Shahan, president of the Consumers for Auto Reliability and Safety, a nonprofit auto-industry consumer watchdog based in Sacramento. “But the bigger the flag, the worse their practices. You get to be very cynical about it.”

In some areas, base brass are relying upon upstanding car dealers to police their own. Near Fort Campbell, Ky., and in coastal southeast Virginia, home to one of the largest military concentrations in the U.S., auto-sales businesses agreeing to a code of ethics have formed well-publicized alliances with the BBB and local commands.

Many of the bad guys, especially those working online, are frustratingly elusive. “They’ll just disappear and pop up under different names,” Petraeus says. “You have to get the word out to their targets.” The Pentagon has responded by mandating financial education for recruits. Since 2004, service members have been required to take a course in basic personal finance as part of their early training, and additional instruction is available online or in classes at major installations. The services also encourage enlisted personnel to have military lawyers review contracts before signing them, a free benefit. David Julian, who oversees the Defense Department’s Office of Personal Finance, says education has yielded “service members who are savvier than those of the past.” But he adds that the scammers are getting sharper all the time, too.

As for Diann Traina, now a staff sergeant, she has learned a hard lesson. Three years later, her BMW is a memory, but her $11,000 debt is not. “They said I could give $5000 and they’d consider it settled,” she says. “But I don’t have $5000 to spend on something I shouldn’t have to pay for at all.

“I now feel very educated,” she adds ruefully, “on the process of buying a car.”

_______________________________________________________________________________________ What Congress Is DoingCongress is in the process of creating a new federal Consumer Financial Protection Agency (CFPA) that would guard all Americans, including the military, against scams. Although Pentagon officials specifically requested that the CFPA oversee auto sales, car dealers argue that they should be exempt from such oversight. They say that they’re not responsible for bad loans—bad lenders are. Consumer advocates counter that dealers are often involved in financing and sometimes work directly with loan providers. At press time, the issue remained under debate.

AMG/Parade Digital

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